September 2017

09/27/2017

ICSA and the Investment Association have published a guidance document titled The Stakeholder Voice in Board Decision-Making: see here (pdf). The guidance - welcomed by the Government and Financial Reporting Council - contains ten core principles, and its purpose is "...to help company bards think about how to ensure they understand and weigh up the interests of their key stakeholders when taking strategic decisions".

I remain unconvinced of the merits of stakeholder voice in corporate governance.

American industrial enterprises long organized their production processes in rigid hierarchies in which production-level employees had little discretion or decision making authority. Recently, however, many firms have adopted participatory management programs purporting to give workers a substantially greater degree of input into corporate decisions. Quality circles, self-directed work teams, and employee representation on the board of directors are probably the best-known examples of this phenomenon.

These forms of workplace organization have garnered considerable attention from labor lawyers and economists, but relatively little from corporate law academics. This is unfortunate, both because the tools routinely used by corporate law academics have considerable application to the problem and because employee participation is ultimately a question of corporate governance.

According to conventional academic wisdom, perceptions of procedural justice are important to corporate efficiency. Employee voice promotes a sense of justice, increasing trust and commitment within the enterprise and thus productivity. Workers having a voice in decisions view their tasks as being part of a collaborative effort, rather than as just a job. In turn, this leads to enhanced job satisfaction, which, along with the more flexible work rules often associated with work teams, results in a greater intensity of effort from the firms workers and thus leads to a more efficient firm.

Although this view of participatory management has become nearly hegemonic, the academic literature nevertheless remains somewhat vague when it comes to explaining just why employee involvement should have these beneficial results. In contrast, my article presents a clear explanation of why some firms find employee involvement enhances productivity and, perhaps even more important, why it fails to do so in some firms. Despite the democratic rhetoric of employee involvement, participatory management in fact has done little to disturb the basic hierarchial structure of large corporations. Instead, it is simply an adaptive response to three significant problems created by the tendency in large firms towards excessive levels of hierarchy. First, large branching hierarchies themselves create informational inefficiencies. Second, informational asymmetries persist even under efficient hierarchial structures. Finally, excessive hierarchy impedes effective monitoring of employees. Participatory management facilitates the flow of information from the production level to senior management by creating a mechanism for by-passing mid-level managers, while also bringing to bear a variety of new pressures designed to deter shirking.

There are two starkly different sides to the heated debate over staggered boards. On one are those who argue, based in part on work by Professors Lucian Bebchuk and Alma Cohen, that the staggered board is value decreasing because it enables the entrenchment of inefficient directors and management. On the other side are proponents of the exact opposite argument, based in part on work by Professors Martijn Cremers, Lubomir Litov, and Simone Sepe and on the views of lawyer Martin Lipton, that the staggered board increases firm value because it allows directors to bargain for higher takeover premiums and to have an undisturbed long-term investment strategy. These important and careful studies and this debate have driven recent law review policy proposals calling for either banning the staggered board or making it mandatory for all companies. Studies finding negative wealth effects of a staggered board have also undergirded a campaign by the Harvard Law School Shareholder Rights Project to push publicly-traded companies in the S&P 500 to eliminate their staggered boards.

In Settling the Staggered Board Debate, forthcoming in the University of Pennsylvania Law Review, we show that, empirically, neither side of the debate is right. The article gives clarity to the policy arguments and provides novel estimation results on the effects of a staggered board on firm value. Our empirical analysis builds on prior studies employing different estimations and shows that, contrary to the prior, major studies, a staggered board has no significant effect on firm value.

Those studies, including one by professors Bebchuk and Cohen, do not include important explanatory variables in their analyses that affect firm value and at the same time are correlated with the presence or absence of a staggered board.

With all due deference to Steven Davidoff, for whom I have immense respect, and all my other colleagues and friends who do empirical research, this is one of the many reasons why I am dubious of number crunching as an approach to solving legal questions: Fidgeting with the methodology can produce wildly different results, so how do you decide what result to trust?

U.S. senators, already facing distress calls from constituents over the EquifaxInc. hack, criticized the Securities and Exchange Commission’s new leader for how the agency handled a 2016 breach of its cornerstone system for storing market-moving information.

“I was disturbed to learn that the SEC suffered a cyberbreach of its Edgar system in 2016, but did not notify the public, or even all of its commissioners, until it was discovered during your recent review,” Sen. Mike Crapo (R., Idaho), chairman of the Senate Banking Committee, said at a hearing Tuesday.

Which prompts two thoughts:

A former SEC Commissioner once told me that there is a long history of SEC chairmen treating their fellow commissioners like mushrooms: "they keep us in the dark and cover us in shit." It seems Mary Jo White continued that long tradition and that Clayton may well be doing so too.

You know the passage in the Bible about not trying to take a splinter out of your brother's eye when there's a great whacking beam in your own? Before it gets all self-righteous about corporations that allegedly have inadequate controls, maybe the SEC ought to ponder that passage. After all, there is another longstanding tradition at the SEC: having crappy internal controls.

09/25/2017

Several Catholic organizations have established emergency relief operations for the thousands of people affected by Hurricanes Maria and Irma in the Caribbean and southeastern United States and for those still recovering from Hurricane Harvey in Texas and Louisiana, as well as those affected by earthquakes in Mexico.

Catholic Charities USA is the official domestic relief agency of the U.S. Catholic Church. Donations to the agency’s disaster fund supports disaster response and recovery efforts including direct assistance, rebuilding, and health care services.

Long-term recovery also is an integral part of Catholic Charities’ efforts, according to its website. “We work tirelessly to ensure individuals can live their lives with the dignity we all deserve.” The agency provides assistance to all, regardless of religion, social or economic background. And “100 percent of funds raised are going to those affected,” the website reads.

The Texas Catholic Conference is coordinating emergency services in the aftermath of Hurricane Harvey, which dropped more than 50 inches of rain on the Houston area. A listing by diocese of where to give has been posted online at https://txcatholic.org/harvey

Catholic Relief Services, the official international humanitarian agency of the U.S. Catholic community, is taking donations for emergency shelter, water and critical supplies for families throughout the Caribbean Islands and Mexico:

Catholic Relief Services is rated 21st out of the top 50 US charities by Christian Science Monitor, with a CharityWatch grade of A+ and a 4 stars out of 4 from Charity Navigator.

09/19/2017

A fifth of undergrads now say it’s acceptable to use physical force to silence a speaker who makes “offensive and hurtful statements.”

That’s one finding from a disturbing new survey of students conducted by John Villasenor, a Brookings Institution senior fellow and University of California at Los Angeles professor.

... when students were asked whether the First Amendment protects “hate speech,” 4 in 10 said no. This is, of course, incorrect. Speech promoting hatred — or at least, speech perceived as promoting hatred — may be abhorrent, but it is nonetheless constitutionally protected.

Somedays I wonder if this is what living in the Weimar Republic felt like.

We address the heated debate over the staggered board. One theory claims that a staggered board facilitates entrenchment of inefficient management and thus harms corporate value. Consequently, some institutional investors and shareholder rights advocates have argued for the elimination of the staggered board. The opposite theory is that staggered boards are value enhancing since they enable the board to focus on long-term goals. Both theories are supported by prior and conflicting studies and theoretical law review articles. We show that neither theory has empirical support and on average, a staggered board has no significant effect on firm value. Prior studies did not include important explanatory variables in their analysis or account for the changing nature of the firm over time. When we correct for these issues in a sample of up to 2,961 firms from 1990 to 2013 we find that the effect of a staggered board on firm value becomes statistically insignificant after controlling for variables that affect both value and the incidence of a staggered board. Notably, we find that the adoption of a staggered board, its retention, and its removal are not random and exogenous but are rather endogenous, being related to firm characteristics and performance. The effect of a staggered board is idiosyncratic; for some firms it increases value, while for other firms it is value destroying. Our results suggest caution about legal solutions which advocate wholesale adoption or repeal of the staggered board and instead point to an individualized firm approach.

In my experience, there are very few mandatory terms of corporate law that fit everybody. Once again, the evidence seems to support an enabling approach.

CORRECTION: The Center will not, contrary to the NLJ headline, shut down entirely, but it has been stripped of one of its previous academic functions. (Thanks to several readers who wrote to me about this.)

Candidly, it's never been clear to me why clinics at taxpayer-subsidized law schools should have unfettered discretion to sue state officials. In effect, it puts the taxpayers on both sides of the suit, which amounts to a lose-lose proposition.

It's especially puzzling when we consider that law school clinics suing the state tend to be highly partisan,"cause" lawyering in service of the left.

We examine the glass cliff proposition that female CEOs receive more scrutiny than male CEOs by investigating whether CEO gender is related to threats from activist investors in public firms. Activist investors are extra-organizational stakeholders who, when dissatisfied with some aspect of the way the firm is being managed, seek to change the strategy or operations of the firm. Although some have argued that women will be viewed more favorably than men in top leadership positions (so-called ‘female leadership’ advantage logic), we build on role congruity theory to hypothesize that female CEOs are significantly more likely than male CEOs to come under threat from activist investors. Results support our predictions, suggesting that female CEOs may face additional challenges not faced by male CEOs. Practical implications and directions for future research are discussed.

President Trump has nominated Columbia law professor Robert Jackson to the SEC. Jackson will be one of the two Democratic Commissioners, if confirmed. Although I respect Jackson's considerable intellect, it is a nomination that deeply concerns me. Along with his mentor Lucian Bebchuk, Jackson has been a consistent proponent of federalization of corporate governance, shareholder empowerment, and politicizing disclosure by requiring, inter alia, corporate disclosure of political campaign contributions. We fundamentally disagree on a slew of issues. As the saying goes, it's not personal. It's strictly business.

Here's a sampling of posts over the years in which I've taken issue with Jackson's positions on the issues:

As we know: Lucian Bebchuk is Professor of Law, Economics, and Finance at Harvard Law School. Robert J. Jackson, Jr. is Professor of Law at Columbia Law School. Bebchuk and Jackson served as co-chairs of the Committee on Disclosure of...

Lucian Bebchuk and Robert Jackson are celebrating--as if it were good news--Hillary Clinton's endorsement of their proposed "SEC rulemaking that would require public companies to disclose their political spending to their shareholders." ...

From Harvard's corporate governance blog: In a recent paper, Professors Lucian Bebchukand Robert Jackson have extended Professor Bebchuk’s extreme and eccentric campaign against director-centric governance into a new realm—that of th...

I'm delighted to offer the first guest post in ProfessorBainbridge.com's decade of publishing. Preempting Professors Bebchuk and Jackson: Poison Pills, State Corporate Law, and the Williams Act by Lyman Johnson & David Millon Washing...

Larry Ribstein weighs in on Lucian Bebchuk acolyte Robert Jackson's proposal "to, among other things, majority shareholder voting on corporate speech decisions." Larry opines that: The main point to emphasize here is that there is no ...

Lucian Bebchuk's acolytes continue to spread the claim that shareholders ought to be actively involved in an ever-expanding array of corporate decisions. The latest case in point is Robert Jackson's post at the Harvard Forum, which asser...

The strongest argument against dual class stock rests on conflict of interest grounds. There is good reason to be suspicious of management's motives and conduct in certain mid-term dual class recapitalizations.[1] Dual class transactions motivated by their anti-takeover effects, like all takeover defenses, pose an obvious potential for conflicts of interest. If a hostile bidder succeeds, it is almost certain to remove many of the target's incumbent directors and officers. On the other hand, if the bidder is defeated by incumbent management, target shareholders are deprived of a substantial premium for their shares. A dual class capital structure, of course, effectively assures the latter outcome.

In addition to this general concern, a distinct source of potential conflict between managers' self-interest and the best interests of the shareholders arises in dual class recapitalizations. An analogy to management-led leveraged buyouts ("MBOs") may be useful. In these transactions, management has a clear-cut conflict of interest. On the one hand, they are fiduciaries of the shareholders charged with getting the best price for the shareholders. On the other, as buyers, they have a strong self-interest in paying the lowest possible price.

In some dual class recapitalizations, management has essentially the same conflict of interest. Although they are fiduciaries charged with protecting the shareholders' interests, the disparate voting rights plan typically will give them voting control. The managers' temptation to act in their own self-interest is obvious. Yet, unlike MBOs, in a dual class recapitalization, management neither pays for voting control nor is its conduct subject to meaningful judicial review. As such, the conflict of interest posed by dual class recapitalizations is even more pronounced than that found in MBOs.

While management's conflict of interest may justify some restrictions on some disparate voting rights plans, it hardly justifies a sweeping prohibition of dual class stock. First, not all such plans involve a conflict of interest. Dual class IPOs are the clearest case. Public investors who don't want lesser voting rights stock simply won't buy it. Those who are willing to purchase it presumably will be compensated by a lower per share price than full voting rights stock would command and/or by a higher dividend rate. In any event, assuming full disclosure, they become shareholders knowing that they will have lower voting rights than the insiders and having accepted as adequate whatever trade-off is offered by the firm in recompense. In effect, management's conflict of interest is thus constrained by a form of market review.

Another good example of a dual class transaction that fails to raise conflict of interest concerns is subsequent issuance of lesser-voting rights shares. Such an issuance does not disenfranchise existing shareholders, as they retain their existing voting rights. Nor are the purchasers of such shares harmed; as in an IPO, they take the shares knowing that the rights will be less than those of the existing shareholders. For the same reason, issuance of lesser-voting rights shares as consideration in a merger or other corporate acquisition should not be objectionable.

Second, even with respect to those disparate voting rights plans that do raise conflict of interest concerns, it must be recognized that there is only a potential conflict of interest. Despite the need for skepticism about management's motives, it is worth remembering that "having a 'conflict of interest' is not something one is 'guilty of'; it is simply a state of affairs."[2] That the board has a conflict of interest thus does not necessarily mean that their conduct will be inconsistent with the best interests of any or all of the corporation's other constituents. To the contrary, the annals of corporate law are replete with instances in which managers faced with a conflict of interest did the right thing.[3] The mere fact that a certain transaction poses a conflict of interest for management therefore does not justify a prohibition of that transaction. It simply means that the transaction needs to be policed to ensure that management pursues the shareholders' best interests rather than their own.